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Monday, March 14, 2016

14/3/2016: Inheritance-Rich Social Disasters?

Using microdata from the Household Finance and Consumption Survey (HFCS), a recent research paper from the ECB examined “the role of inheritance, income and welfare state policies in explaining differences in household net wealth within and between euro area countries.”

Top of the line findings:

1) “About one third of the households in the 13 European countries we study report having received an inheritance, and these households have considerably higher net wealth than those which did not inherit.” Which is sort of material: in a democracy 1/3 of voters making their decisions based on inherited wealth can and (I would argue) does impose a cost on those who do not stand (do not expect) to inherit wealth. Examples of such mis-allocations? Take Ireland, where everything - from retirement to housing markets to childcare provision to education hours is predicated on transfers of income and / or wealth within the family. While those who stand to gain through this system cope well, those who stand to not gain through this familial wealth and income transfers system, stand to lose. Guess who the latter are? Of course: the poor (or those from the poor background, even if they are higher earners today) and the foreign-born.

2) “Regression analyses on households' relative wealth position show that, on average, having received an inheritance lifts a household by about 14 net wealth percentiles. At the same time, each additional percentile in the income distribution is associated with about 0.4 net wealth percentiles. These results are consistent across countries.” Which, in basic terms means that you have to work 2.5 times harder to achieve the same impact as inheritance for every point increase in inherited wealth. Merit, you say? Of course not: daddy’s money vastly outperforms, as far as financial returns go, own education, effort, aptitude etc… Though, of course, here’s a pesky bit: for all those pursuing equality and other nice social objectives, higher income taxes, of course, make it even less feasible for income (work) to catch up with inherited wealth. Which might explain why well-heeled (and often inept) folks of Dublin South are so much in favour of the ideas of raising income taxes, but are not exactly enthused about hiking inheritance taxes.

3) “Multilevel cross-country regressions show that the degree of welfare state spending across countries is negatively correlated with household net wealth.” Which, basically, says the utterly unsurprising: wealthy households don’t rely on social welfare. Doh, you’d say. But not quite. The “findings suggest that social services provided by the state are substitutes for private wealth accumulation and partly explain observed differences in levels of household net wealth across European countries. In particular, the effect of substitution relative to net wealth decreases with growing wealth levels. This implies that an increase in welfare state spending goes along with an increase -- rather than a decrease -- of observed wealth inequality.”

In other words, inheritance induces higher inequality in wealth. It compounds this effect by allocating inheritance without any sense of merit and at an indirect (policy) cost to those households that are not standing to inherit wealth. Which means that more inheritance-based is the given society, more wealth inequality you will get in it, and less merit in wealth allocation will result. Which, in turn implies you gonna pay for this with higher taxes (everyone will, except, of course, the really wealthy).

Next time you driving through, say Monkstown, check them out: the *daddy’s money* wandering around… they cost you, in tax, in higher charges for policy-related services, and in merit-less society.

Full paper here: Fessler, Pirmin and Schuerz, Martin, Private Wealth Across European Countries: The Role of Income, Inheritance and the Welfare State (September 22, 2015). ECB Working Paper No. 1847: http://ssrn.com/abstract=2664150

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